Tax Reduction and the Michigan Economy

Table 1

For almost a half century following the beginning of the Great Depression, Michigan enjoyed per-capita income above the national average. Beginning in the early 1980's, our per capita income dropped to and below the national average, where it stands today. This decline in relative economic strength came on the heels of a dramatic increase in state and local tax burdens beginning in the 1960's.

Both economic theory and common sense hold that Michigan's high tax burden depresses economic growth by reducing the disposable income available to consumers, and discouraging entrepreneurs from locating in the state.[7] Research beginning in the late 1970's,and continuing into this decade, has confirmed that high tax burdens are associated with slower job growth, more unemployment, less attraction of new businesses, and income stagnation. These studies also confirm that reducing tax burdens powerfully improves the economic prospects of a state.[8]

For example, the five states that raised taxes the most between 1978and 1987 saw real per-capita income fall by an average 1.1%, while the five states that reduced taxes the most saw real per-capita income increase by an average8.5%. The five "tax increase" states saw their unemployment rates increase by an average2.6%, while the five "tax cut" states enjoyed a decline in their unemployment rates of an average 0.5%.[9] See Table One.

Two states in the "tax cut" group, California and Massachusetts, began the decade under study with major property tax cuts – "Proposition 13" in California, and "Proposition 2 1/2" in Massachusetts. Both states saw dramatic economic growth following the tax cut, as evidenced by the results in the table. However, by the end of the 1980's or beginning of the 1990's, both had reversed fiscal policy, and substantially increased taxes. Subsequently, both experienced economic and budgetary distress. This is a clear lesson for Michigan: An industrial state can significantly improve its economy with a tax cut, or it can depress its economy with tax increases.